noting plaintiff’s failure to identify “any way in which a further amendment of its factual allegations would cure the amended complaint’s shortcomings”
How later courts described this case
- noting plaintiff’s failure to identify “any way in which a further amendment of its factual allegations would cure the amended complaint’s shortcomings”
- no abuse of discretion in denying leave to amend where plaintiffs “enjoyed a full opportunity to amend, having been apprised of Defendants’ views of the original complaint’s shortcomings”
- no abuse of discretion in denying amendment where a plaintiff “enjoyed a full opportunity to amend, having been apprised of Defendants’ views of the original complaint’s shortcomings”
Written by the judges who cited it.
The opinion
17-63
Brown v. Cerberus Capital Management, L.P.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE
NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A
COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
1 At a stated term of the United States Court of Appeals for the Second Circuit, held at
2 the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
3 on the 11th day of July, two thousand seventeen.
4
5 PRESENT:
6 ROBERT D. SACK,
7 SUSAN L. CARNEY,
8 CHRISTOPHER F. DRONEY,
9 Circuit Judges.
10 _____________________________________
11
12 TONYA BROWN, JOHN ELSTAD, ELIZABETH
13 HOMAN, ALBERT GOEKEN, JEFF SAMPERE,
14
15 Plaintiffs-Appellants,
16
17 v. No. 17-63
18
19 CERBERUS CAPITAL MANAGEMENT, L.P.,
20 CERBERUS COVIS LLC, COVIS HOLDINGS L.P.,
21 COVIS MANAGEMENT INVESTORS LLC, COVIS
22 US HOLDINGS, LLC, COVIS MANAGEMENT
23 INVESTORS US LLC, COVIS PHARMACEUTICALS,
24 INC., ETHAN KLEMPERER, MICHAEL KELLY,
25 MICHAEL WELLS, PRINCETON BIOPHARMA
26 COINVESTMENT I, L.P., PRINCETON BIOPHARMA
27 CAPITAL PARTNERS, LLC, ALEXANDER
28 BENJAMIN,
29
1 Defendants-Appellees.
2 _____________________________________
3
4
5 FOR PLAINTIFFS-APPELLANTS: JOSHUA L. SEIFERT, New York, New York.
6
7 FOR DEFENDANTS-APPELLEES: SHEILA A. SADIGHI (Gavin J. Rooney, on
8 the brief), Lowenstein Sandler LLP, New
9 York, New York.
10 Appeal from a judgment of the United States District Court for the Southern District
11 of New York (Daniels, J.).
12 UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
13 ADJUDGED, AND DECREED that the December 13, 2016 judgment entered by the
14 District Court is AFFIRMED.
15 Plaintiffs are former employees of Covis Pharmaceuticals Inc. (“CPI”), whose
16 grievances arise out of Defendants’ purported misstatements, omissions, and other allegedly
17 fraudulent conduct surrounding a 2013 reorganization of the “Covis enterprise” (a term we
18 use, as do the parties, to refer collectively to CPI and other Covis companies). As part of that
19 reorganization, CPI was separated from its one-time parent, Covis Holdings L.P. (“CLP”), and
20 became a subsidiary of Covis US Holdings, LLC (“C-US”). Plaintiffs allege that, before the
21 reorganization, they held valuable profits interests in CLP but, as part of the reorganization,
22 they exchanged those interests for less valuable profits interests in C-US, in reliance on
23 Defendants’ actions. On appeal, Plaintiffs challenge the District Court’s dismissal under Rule
24 12(b)(6) of their federal securities fraud claims. They argue that the District Court improperly
25 relied on documents outside the complaint in ruling on the adequacy of their allegations, and
26 assert that the District Court further erred in declining to grant them a second opportunity to
27 amend their complaint. We assume the parties’ familiarity with the underlying facts and the
28 procedural history of this case, to which we refer only as necessary to explain our decision to
29 affirm.
2
1 By their failure to pursue it in their opening brief, see LoSacco v. City of Middletown, 71 F.3d
2 88, 92 (2d Cir. 1995), Plaintiffs have abandoned the theory of securities fraud that they pressed
3 before the District Court: that Defendants violated Rule 10b-5 by making material
4 misstatements about the value of the C-US profits interests and a tax “gross up” to induce
5 Plaintiffs’ continued employment at CPI, Am. Compl. ¶ 23. In any event, the District Court
6 correctly determined that the amended complaint lacks sufficient allegations of scienter to
7 support Plaintiffs’ now-abandoned theory. Under the Private Securities Litigation Reform Act
8 (“PSLRA”), a plaintiff must plead facts “giving rise to a strong inference” of scienter, 15
9 U.S.C. § 78u–4(b)(2)(A); see also In re Advanced Battery Techs., Inc., 781 F.3d 638, 644 (2d Cir.
10 2015), and cannot rely on “motives possessed by virtually all corporate insiders,” Novak v.
11 Kasaks, 216 F.3d 300, 307 (2d Cir. 2000), to support their claims. We conclude after de novo
12 review that the amended complaint did not meet this heightened pleading standard.
13 Plaintiffs now assert, for the first time, that Defendants engaged in “insider trading” by
14 inducing Plaintiffs—through material misrepresentations and omissions—to swap their more
15 valuable profits interests in the pre-reorganization CLP for less valuable profits interests the
16 post-reorganization C-US. Pls.’ Br. 33-34. Because this theory was not raised before the
17 District Court, we decline to evaluate it here. Mago Int’l v. LHB AG, 833 F.3d 270, 274 (2d Cir.
18 2016) (“We have repeatedly held that if an argument has not been raised before the district
19 court, we will not consider it [on appeal].” (internal quotation marks and alteration omitted)).
20 Plaintiffs next argue that the District Court improperly relied on documents outside the
21 complaint in dismissing Plaintiff Albert Goeken’s securities fraud claim based on Defendants’
22 failure to inform him of Covis’s merger negotiations with an unknown party when he decided
23 to retire. In particular, Plaintiffs argue that the District Court improperly relied on Defendants’
24 November 10, 2015 letter to Plaintiffs, in which Defendants characterize the relevant merger
25 negotiations as “fruitless”—a term found nowhere in the amended complaint but quoted in
26 the District Court’s decision. Joint Appendix 551. Even if the District Court did err in making
27 this reference, however, Plaintiffs’ securities fraud claim nonetheless fails because the
3
1 amended complaint fails to plead facts from which the materiality of those negotiations may be
2 inferred.
3 To determine whether a misrepresentation is material, we “look to whether there is ‘a
4 substantial likelihood that the disclosure of the omitted fact would have been viewed by the
5 reasonable investor as having significantly altered the “total mix” of information made
6 available.’” Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 F.3d 86,
7 92–93 (2d Cir. 2010) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)). The amended
8 complaint alleges that “in the early summer of 2014, Cerberus and Covis entered into
9 negotiations with a pharmaceutical company regarding a potential merger,” that “Defendant
10 Kelly failed to disclose to Mr. Goeken that Cerberus and Covis were in on-going merger
11 negotiations with a pharmaceutical company,” and that “when Mr. Goeken resigned his
12 position in August 2014, Defendant Kelly failed to disclose that Covis had recently received a
13 merger proposal and that negotiations were ongoing.” Am. Compl. ¶¶ 232, 251, 344. Even
14 accepting that merger negotiations were ongoing, in the context described in the amended
15 complaint these allegations are insufficient to support an inference that the negotiations were
16 material. See Basic, 485 U.S. at 239 (noting, in summary judgment setting, that the materiality of
17 merger negotiations might be evidenced by factors such as “board resolutions, instructions to
18 investment bankers, and actual negotiations between principals or their intermediaries”). The
19 amended complaint alleges that the business plan of the Covis enterprise (and familiar to
20 Plaintiffs) was that it would try to sell itself or its assets soon after developing a market in the
21 pharmaceuticals that it acquired. Merger discussions and negotiations were thus to be
22 expected, based on Plaintiffs’ own description. Plaintiffs do not allege that these pending
23 negotiations bore fruit and, in fact, the complaint alleges that the Covis enterprise did not
24 receive the merger bid that it eventually accepted until some six months after Goeken retired.
25 This case is thus distinguishable from Castellano v. Young & Rubicam, Inc., 257 F.3d 171
26 (2d Cir. 2001), on which Plaintiffs rely. In Castellano, the court concluded that a jury could find
27 that a closely held corporation should have disclosed to an executive who was contemplating
28 selling shares back to the corporation upon his retirement—the timing of which was within his
4
1 control—that merger negotiations (though failed) had been undertaken. Id. at 175, 182. The
2 court reasoned that the fact of even failed merger negotiations was material to the plaintiff and
3 could support a Rule 10b-5 claim because they “signaled a new willingness on behalf of [the
4 company’s] management to consider [a] sale of the company to a third party,” when the
5 company had a long history to the contrary and parties in control had assured the executive
6 that no change was on the horizon. Id. at 176, 181. Here, the opposite is true: Plaintiffs allege
7 that, from the inception of their involvement in the Covis enterprise, Plaintiffs knew that the
8 venture was “short term” and that Covis executives were interested in quickly selling corporate
9 assets once value could be realized. Am. Compl. ¶¶ 4, 54, 89. The pendency of merger
10 negotiations thus signaled no more than the Covis enterprise’s continued adherence to its
11 announced corporate strategy.
12 Finally, Plaintiffs seek leave to amend their already once-amended complaint. This
13 Court reviews “a district court’s decision to permit or deny leave to amend a complaint for
14 abuse of discretion.” Balintulo v. Ford Motor Co., 796 F.3d 160, 164 (2d Cir. 2015). It is “within
15 the court’s discretion to deny leave to amend implicitly by not addressing the request when
16 leave is requested informally in a brief filed in opposition to a motion to dismiss.” In re
17 Tamoxifen Citrate Antitrust Litig., 466 F.3d 187, 220 (2d Cir. 2006), abrogated on other grounds by
18 F.T.C. v. Actavis, Inc., 133 S. Ct. 2223 (2013). We perceive no abuse of discretion here. Plaintiffs
19 enjoyed a full opportunity to amend, having been apprised of Defendants’ views of the original
20 complaint’s shortcomings, and have continued only to shift theories of recovery, as reflected
21 in their briefs, without identifying any way in which a further amendment of its factual
22 allegations would cure the amended complaint’s shortcomings.
23 We have considered all of Plaintiffs’ remaining arguments and conclude that they are
24 without merit. Accordingly, we AFFIRM the December 13, 2016 judgment of the District
25 Court.
26 FOR THE COURT:
27 Catherine O’Hagan Wolfe, Clerk of Court
5